Generally Accepted Accounting Principles (GAAP)

All publicly-traded companies must produce income statements, balance sheets, and cash flow statements for each quarter and year in accordance with Generally Accepted Accounting Principles (GAAP).

What are the Generally Accepted Accounting Principles or GAAP?

Chart of Accounts

To fully understand the accounting process and its role in the business, it’s important to understand the chart of accounts.

A chart of accounts is a list of all the accounts within a company, along with various details about each account, such as the account number, account type, and description. It is how expenses are classified. At Walmart, the chart of accounts has two major components:

• The Cost Center indicates where the financial activity (e.g., profit, expense) takes place, i.e. the department responsible for paying for the expense. 
• The Account indicates the type of financial activity (e.g., revenue, expense, cost of goods) grouped by category, or “Packages” for SG&A purposes. 

The chart of account helps provide visibility to where the activity is taking place (cost center) and what type of activity is taking place (accounts). The visibility leads to understanding the activities, as well as holding teams accountable for the activity. 

Controllership in Ledgers and Financial Statements 

If you work in Finance, it is critical that you are aware of the controllership function of overseeing all official financial statements and financial reporting including income statements, balance sheets, statement of cash flow, ledgers, and chart of accounts. A financial controller (FC) is tasked with ensuring their accuracy, compliance, proper preparation, as well as analysis of their data.

Forecast vs Plan vs Actuals 

How can a business know whether they’ll have enough funds to invest in a new business initiative? Or enough cash-flow to pay its employees? Or, perhaps, how much revenue will be required to pay for all expected costs? These are questions that can be answered through accurate financial forecasting. It’s questions like these that make forecasting not only something that should be done but also something that should be done right. 

Forecasting is the process of predicting revenues and expenses both on a shorter term (monthly/quarterly) to mid-term (first half/second half) basis. It allows businesses to know what expenses to expect and how much money will be at their disposal. Such insight naturally plays a critical role in overall business success, affecting areas such as:

• Company decisions 
• Future planning
• Financial planning to meet set goals
• Proactive risk-mitigation
• Third-party investments and stock purchase (due to reliable planned vs actual financial reports)

To level-set on terminology:

• A financial forecast estimates what future income, revenue, and expenses will most likely be. Forecasts are performed periodically to take a pulse of the business. 
• A financial plan explains the steps that will need to be taken to produce future income while managing future expenses. A financial plan is typically set once a year. 
• The actuals are how the business performed financially (backwards looking).  

Variance Analysis

A variance analysis is a statistic tool used to retrospectively assess the difference between what a company forecasted and planned for and the actual. After the quarter and year, it’s essential to look back and analyze the forecast and financial plan to actual outcomes, which will generate valuable insight for better accuracy in the future. This is called a Budget to Actual Report.